Derelict Plants Are Crippling Iraq's Petroleum Industry

By JAMES GLANZ

New York Times

March 3, 2005

BASRA, Iraq, March 2 - The five spindly towers, each 325 feet tall, were silent, with no flames burning at their collapsed and blackened tips. But Abdul Raof Ibraheem, production manager at this huge propane and butane plant, knew very well what could happen if, say, a military helicopter were to fly over.

"Any spark," Mr. Ibraheem said, motioning with his hands. "Explode."

The plant spews out invisible, odorless but extremely flammable waste gases because officials do not want to shut down the damaged equipment for repairs. Properly functioning, the plant would burn off those gases in flares at the top of the towers. But if engineers tried lighting the damaged tips now, they could blow up the entire complex.

"Of course," Mr. Ibraheem said sheepishly, "it's dangerous."

Iraq is facing enormous pressure to convert its rich oil inheritance into a measure of comfort and prosperity. Despite having 100 billion to 200 billion barrels of oil reserves, the third most in the world by some estimates, Iraq still must import half its gasoline and thousands of tons of heating fuel, cooking gas and other refined products.

And with the petroleum sector crumbling, Iraqi officials must soon decide whether to invest in time-consuming repairs and upgrades, or try to extract everything they can from the creaky equipment, as Saddam Hussein did. It is a tricky decision: Because the rebuilding effort is financed from oil revenues, shutting down the system for desperately needed repairs cuts back on the money available for further repairs.

A journey last month to a number of the vital organs in Iraq's critical but often derelict southern petroleum industry - wells, pipelines, pumping stations, ports and plants for things like heating fuel - underscored how difficult those decisions are likely to be. It showed as well the depths of the industry's distress after decades of neglect, the looting and sabotage that followed the United States-led invasion in 2003, and continuing attacks by insurgents.

About $3 billion has been set aside for the Ministry of Oil, the minister, Thamir Ghadhban, said in a recent interview. But the final level of financing depends on revenues, which in turn depend almost entirely on the security situation.

Losses due to sabotage exceeded $6 billion last year, cutting revenues by nearly a third, Mr. Ghadhban said. The pace of attacks has dropped recently in the south but continues unabated in the north. Saboteurs struck again in the north in late February, setting ablaze a pipeline that funnels oil to Kirkuk.

Washington has set aside $1.7 billion for Iraq's oil industry, although up to 40 percent of that money is projected to go for overhead costs, including security, said Julian O'Connell, a manager at the Project and Contracting Office, which is administering the program.

Given the political pressures and the conflict between the competing needs for repairs and production, it is not surprising that many here are calling for an all-out push to extract as much crude as possible.

"Any extra barrel for this country, I encourage it, providing the interests of the Iraqis are kept," said Jabbar A. H. al-Ueibi, director general of the government-owned South Oil Company. "We should work day and night to increase our production."

The plants and refineries that turn those barrels into usable products will have to ramp up at the same time. Twenty-three months after the American-led invasion and the looting that followed, for example, the damaged heating-fuel plant has still achieved only about a third of the production level of the last days of Mr. Hussein's rule, when the plant put out 3,000 tons a day of the fuel, liquid petroleum gas.

The postwar destruction at many petroleum installations like that fuel plant went beyond simple looting, said Jim Humphries, a project manager at Kellogg, Brown & Root, the Halliburton subsidiary that won the contract to do the oil work.

"This is sabotage," said Mr. Humphries, pointing to one gutted control-room panel at the plant. "This was somebody trying to do the most damage in the least amount of time."

Shortfalls like the ones caused by such damage force Iraq, in spite of its vast oil reserves, into the irksome position of having to import enormous quantities of refined products.

The shortfalls are compounded by government subsidies that keep prices absurdly low. Gasoline, for example, costs about 5 cents a gallon for people who are willing to wait in lines for hours at gas stations, which like the rest of the petroleum industry are government-owned. The black-market price in Baghdad ranges from 50 cents in normal times to nearly $2 during a nationwide fuel crisis in January.

Those prices encourage both overconsumption and the smuggling of fuel to neighboring countries, Mr. Ghadhban said. The only solution, he said, is to privatize much of the industry and let fuel prices rise to market values. At the same time, he would like to soften the blow to ordinary Iraqis by temporarily giving them ration cards like those they receive for food.

Only the capital generated by market prices will attract foreign investors who can further modernize the industry, Mr. Ghadhban said. As a side benefit, he said, some of the ancient gas stations defacing the Iraqi streetscape may be superceded by new ones built by Iraqi entrepreneurs.

"When I say gas stations," Mr. Ghadhban said, sounding weary of the government-run installations himself, "I mean modern gas stations with a car wash, a small supermarket. It doesn't need a ministry to run a petrol station."

The plan is likely to be seen as strong medicine by Iraqis, who have become accustomed to gasoline that is cheaper than bottled water. But some think that the influential Mr. Ghadhban, if he remains in the new government - or his successor, if he doesn't - will be able to pull off the restructuring even as Iraq grapples with all the other problems besetting the oil industry.

"I believe they can do it," said Mr. O'Connell of the contracting office. "They don't have to take it right up to extreme price right away, but they have to start reducing the subsidy."

But that is a regulatory issue, solvable with the stroke of a pen. A drive through the back roads threading the oil fields around Basra is an eye-opening introduction to other, more daunting challenges. Dotting the landscape are towering flames and black plumes of smoke so thick that they look like oil-well fires. Seen up close, just one of the flames, writhing and billowing and corkscrewing at least 100 feet above a stubby vertical pipe rising from the ground, could be a sentinel at the entrance to hell.

The flames rise from gas-oil separation plants, which are designed to remove gases that are dissolved in freshly extracted crude oil before it is shipped to refineries, power plants and export terminals. In most oil-producing countries those gases are captured and turned into usable products. But in Iraq, where there is still little room for such niceties, most of the gases are simply burned.

"Yeah, it makes you want to cry," said Alton Braudaway, an engineer in plant services with Kellogg, which arranged a tour of some of the southern oil sites for two reporters and a photographer, and which has been repairing and refurbishing many of the sites.

The practice is exorbitantly wasteful and environmentally damaging, but issues like those mean little in Iraq, Mr. Braudaway said. "When it comes down to, 'Do they shut down their plants?', they're going to put the smoke in the sky," he said, "because they need the oil."

If the gas is not going to be used to create petroleum products, Mr. Braudaway said, it would normally be reinjected to keep the pressure up as oil is extracted, insuring a longer life for the wells.

But Iraq does not do that either. Instead, in the south, which has 80 percent of the country's oil reserves, it uses an antiquated system of water injection to keep the pressure up. (The problems are even worse in the north, where for reasons known only to themselves, Iraqi engineers pumped things like excess fuel oil, refinery residues and old crude oil into some wells, probably damaging them permanently.)

At one "cluster pump" station with a new computerized control system that the American money had purchased, the water appeared to be flowing normally when a group of visitors arrived, although one major pump had broken down minutes before.

At another pumping station, which moves crude through one of two critically important pipelines for export from platforms in the Persian Gulf, the equipment was oil-encrusted and generally could have used a coat of paint, but it seemed to be functioning.

The problems with the liquefied gas plant, though, immediately caught the attention of the Kellogg engineers as they drove up in a convoy of sport utility vehicles. "It is very dangerous," Mr. Humphries said of the gas streaming from the broken towers. "You're just pushing it off into the atmosphere."

Mr. Ibraheem, the production manager, said the British military, which has responsibility for the south of Iraq, had been warned not to fly in the area. And as he began to lead a tour through the plant, he asked a photographer not to use his flash. "Camera makes sparks," Mr. Ibraheem said.

The tour passed without incident, but as the visitors were leaving, they encountered five big metal cylinders lying on the ground next to a road. It turned out they were new tips for the towers that the plant had been storing since before the war.

But the new plant managers had not been able to find the huge cranes that would be needed to put the tips in place. Now the engineers are hoping to install them by May.

Standing next to the replacements was Hassan Monsour Fadher, a retired safety manager at the plant. When asked how the tips would work, Mr. Fadher demurred and said, chuckling: "You are giving me exam."